Question

Stock R has a beta of 2.5, Stock S has a beta of 0.25, the required return on an average stock is 10%, and the risk-free rate of return is 3%. By how much does the required return on the riskier stock exceed the required return on the less risky stock

Answer 1

Excess return=0.1575=15.75%

Step-by-step explanation:

Given Data:

Stock R beta=2.5

Stock S beta=0.25

return on an average stock=10%

the risk-free rate of return=3%

Required:

Excess return=?

Solution:

Difference in beta=Stock R beta-Stock S beta

Difference in beta=2.5-0.25

Difference in beta=2.25

Market Premium= return on an average stock-the risk-free rate of return

Market Premium=10%-3%

Market Premium=7%

Excess return=Market Premium*Difference in beta

Excess return=7%*2.25

Excess return=0.07*2.25

Excess return=0.1575=15.75%